World classic markets are shaking with viruses and oil shocks. In this environment, Bitcoin is accused of not rising. It is said that the discourses of “safe harbor” and “value storage tool” are over.
However, the US stock markets are experiencing historic decreases today. The records that are not seen in 200-odd years are breaking in areas such as daily point loss and entry rate to the bear market.
Bitcoin has always been more volatile than traditional tools, or ‘volatile’ in the market. Those who invest in Bitcoin and especially other cryptocurrencies should know this fact from the beginning.
Attacks the Dollar First in a Crisis Environment
When the crisis period begins, first the dollar, euro and yen-like currencies are attacked in the modern monetary system. Because these are the currencies accepted as ‘solid money’ at the center of the system. However, the production of these currencies is not limited. Coins, which are limited in production and really solid, such as gold and silver, fall before the crisis. In 2008, Gold had fallen by 25% and Silver by 51%.
Gold and Bitcoin in a Crisis Environment
Gold and Silver fall first in the crisis because investors eating margin calls in exchanges have to increase collateral to stay in the market. That’s why he sells other assets. Gold collaterals in the credit markets are also sold.
Production of Bitcoin is also limited. In this case, is Bitcoin experiencing a downturn like Gold and Silver? Currently, Bitcoin does not hold as much gold in corporate investor portfolios. Today’s movement seems to be mainly due to pre-halving technical correction and fear spread in the markets.
How can Bitcoin act during this crisis period?
The key is in Bitcoin production cost. The researcher named Charles Edwards has developed a model called energy-value equation (EDE) to measure the value of Bitcoin. According to the EDE Model, the value of 1 Bitcoin is equal to the energy cost spent to produce it.
This model can also be used for value measurement of cryptocurrencies working with proof of work-pow other than Bitcoin . However, the model is not very sensitive to price fluctuations. Bitcoin price seems to have decreased by 60 percent in 2011 and 2015 and 45 percent by the end of 2018, calculated by the EDE model. So the model is inadequate to detect Bitcoin dip values.
Bitcoin Production Cost
A user named DataTrader nickname suggests another model called Bitcoin Production Cost (BUM) in an article published on Medium on March 7, 2020. In the BÜM Model, the Bitcoin value takes into account the energy expenditure required to produce a Bitcoin, as well as the capital expenditure. In other words, especially ASIC adds the money invested in mining devices to the costs.
In the figure below, the blue line shows the Bitcoin production cost and the orange line shows the market price.
According to this model, Bitcoin market price has been realized below the production cost in a very short time throughout its 11-year history. In the first half of 2013, a very short period at the end of 2014 and in the first quarter of 2018.
The sudden drop in the blue line, Bitcoin production cost, is due to the huge increases in the capacity of ASIC mining machines with new models. Sudden rises are reward injuries (from halvings). New and more powerful machines are making mining cheaper. In halves, the decrease in the amount of Bitcoin reward obtained with the same expense is multiplying.
Bitcoin is separated from Gold and Silver with the concept of reward halving. Because in Gold and Silver mining, the amount of production and money spent in one day will not remain the same. So, in one day, the production cost of Gold and Silver do not double. This is an advantage if it pushes Bitcoin price up after halving at the moment. However, this may turn into a disadvantage in the distant future. Who knows?
According to the BÜM model, DataTrader states that the cost of producing 1 Bitcoin is about $ 7500. Today, Bitcoin has dropped below this cost. So it got seriously cheap.
Bitcoin production cost will be about $ 14,000
Whereas, when the halving took place in May 2020 according to the BÜM model, assuming that the ‘hashpower’ remained the same and the S19 new mining equipment came into play, Bitcoin production cost would be approximately $ 14,000. The account is in the middle. Throughout history, the price of Bitcoin has not been far below the production cost. After the halves, we also know that, historically, the price of Bitcoin climbed much higher than the production cost. I hope that history will repeat itself.